Tuesday, September 13, 2016

The FT's Izabella Kaminska Asks: What's The Problem With Uber?

 "If we don't get the (autonomous car) software thing nailed, we're not going to be around much longer," 
-Travis Kalanick, CEO, Uber

"I love [self driving cars] all day long," he said. "The Uber experience is expensive because it's not just the car but the other dude in the car. When there's no other dude in the car, the cost [of taking an Uber] gets cheaper than owning a vehicle."
When an audience member asked how drivers might feel about his dream of making them all redundant, he responded:
"I’d say ‘Look, this is the way of the world, and the world isn’t always great.’ We all have to find ways to change with the world."
-Travis Kalanick, CEO, Uber  

I think what he's saying is that in the absence of constraints on competition the driving-people-around-for-money-while-paying-humans business is not at all an attractive place for capital.

A point Ms. Kaminska and I have been raising for the last couple years is that rides taken by current users are subsidized by both the investors who are financing Uber with a negative return on equity and by the drivers who are earning net after-expense wages commensurate with a low skill job and which, in some markets pay less than the local WalMart is paying.

But it's probably better to let the pro handle this. From FT Alphaville:

Mythbusting Uber’s valuation
Uber, the ride hailing app, is the archetypal billion dollar unicorn.

How it’s managed to convince investors it’s worth $62.5bn, however, is the real mystery, given its model is arguably neither innovative or viable.

Put bluntly, what Uber has really managed to do is persuade the world a smart and efficient urban transport system geared towards mass transit — within which taxis cater to the marginal client that’s prepared to pay a premium for an occasional chauffeur-driven ride — can be transformed into a much less economical one, without any commensurate costs being passed on to anyone, whilst somehow also accommodating investor returns.

The key innovations the company has deployed, meanwhile, to convince investors that’s possible have been anything but technological.

To the contrary, they’ve been based on the good old fashioned exploitation of suppliers, notably the paying of (below-cost) earnings to taxi drivers as well as the transfer of investor money directly to customers in the form of subsidies. Crucially, they’ve also based on transference of risk from its own corporate balance sheet to those of its suppliers, most of whom lack the economies of scale or expertise to absorb those risks as efficiently.

Investors, for some inexplicable reason, have failed to see this.

If Uber is cheap it is not because it has out innovated the incumbent cab market, which at the end of the day has access to exactly the same ride-hailing technology. To the contrary, it’s because investors have failed to recognise that the source of its greatest innovations is and always has been cheap money.

Indeed, from egregious undercutting tactics based on promotional giveaways to turning a blind eye to exploitative labour practices thanks to the cheap funding of aggressive lobbying campaigns aimed at changing legal frameworks or the reckless flooding of the market with huge amounts of spare capacity, none of it would be possible without access to cheap financing.

In this way, investors preoccupied with FOMO seem to have missed that for a bespoke chauffeur driven service to be readily available to anyone 24/7 at a price that is competitive with public transport, the ratio of spare drivers to potential riders at peak times must be 1:1. Extend that logic to off-peak times and you realise that for every potential user there must be a score of drivers or more sitting idly in standby mode to accommodate that luxury. Unless every single one of those drivers has a secondary job that doesn’t require any real commitment, that’s tantamount to the re-establishment of an upstairs downstairs server-master model, afforded by subsistence wages on labour’s part.

In a conventional taxi model, of course, prices are smoothed throughout the day to ensure off-peak rates pay for peak services at affordable rates — hence why there are never any taxis around when you need them. You could also say, we all pay a little more at off-peak time to ensure desperate users don’t get gouged at peak time and that as a whole we’re all incentivised to make more responsible and efficient travel arrangements for our day-to-day travel.

In Uber’s model, however, it’s the exact opposite. Overcharging at peak time funds idle capacity at off-peak time, ensuring that whilst there’s always a taxi when you need one, there’s also a substantially larger amount of spare capacity when you don’t.

That’s an incentive model which might make sense for wooing unconscious or inanimate spare capacity back into marginal operation, but not necessarily one for the conscious sort, whose long-term security and welfare is supposed to be the actual objective of technological innovation.
So how has this happened?

BCA’s Brian Piccioni and Paul Kantorovich had a stab at some of the causes of the insanity in a report out at the end of August....MORE
Among the comments was this one:

It's one thing to argue against the valuation - likely not ~$60bn by traditional fully-diluted metrics although likely not worth even worth its much lower true price.

But spare us the empty moralizing about the noble, exploited drivers and their dastardly overlords. This is as clear a case of a transaction between willing buyers and sellers as you'll ever see, with no moral or social qualms to be found by reasonable people. If you think this is somehow exploitive, just be straight about it: you don't support free markets or free people.
The commenter seems to be projecting the 'moralizing' into the article when instead the point is that the driver's perception of fairness is critical to the current operations of the company and any change to mollify drivers is going to cost money, be it higher payouts or industrial action seeking same.
Additionally, driver/company relations are a disclosable risk factor.

We have a few hundred posts on Uber, here's the Google search of the blog if interested:
site:climateerinvest.blogspot.com uber